The problems with housing market data: What does it all really mean?

We're inundated with data on the housing market every day, and the stock market moves rapidly in either direction depending on the perception of the moment: Are things getting better or are they getting worse?

One of the problems with studying the housing market is that it's nearly impossible to draw any useful conclusions from the data. Consider the following data points:

The USA Today reports that existing home sales "skyrocketed" 27% in the fourth quarter of 2009 versus the prior year period, and the "national median price for an existing single-family home was $172,900, or 4.1% below the median price in fourth-quarter 2008."

The problem is that relatively minor changes in the mix of homes being sold can have a dramatic impact on the data, making apples to apples comparisons absolutely impossible.

As the jumbo mortgage market continues to struggle and investors pick up bargain-priced income properties, the median sales price skews lower because such a high percentage of the homes that are selling are low-end properties: million dollar listings just aren't moving these days.

So, you say, no problem: looking at the "average price per square foot" will solve that problem. That irons out the differences in product mix, right?

Nope. The problem is that larger homes typically sell for a lower per-square-foot price than smaller homes of comparable quality in similar areas. A two-bedroom condo might have 900 square feet compared with 600 square feet for a one-bedroom condo in the same complex, but the two-bedroom is unlikely to sell for 50% more money. The 300 square feet represents an extra bedroom, but the greatest cost of the property comes from factors like bathrooms, kitchens, heating systems, etc., which do not rise proportionately with square footage. The extra bedroom is relatively cheap square footage, and that's why smaller properties tend to have a higher per-square-foot value.

Take the Boston market for example: median sales prices are rising while prices per square foot are falling. That seems like a contradiction, but it could make perfect sense: if the market for larger homes has strengthened that would explain the jump in median sales price and the fall in price per square foot. But, and this is the problem, it tells you absolutely nothing about home values. It just tells you what kinds of homes are selling.

If you're trying to get a handle on the real estate market in your area, looking at broad data points like this is probably not the way to go. Instead, look at a certain property and then see what prices comparable properties sold for last year and the year before -- and note changes in the days on market too, to get an idea of liquidity. A local realtor can supply you with all this information, or you can find much of it yourself online.